Contractual indemnity and duty to mitigate
CODEMASTERS v AUTOMOBILE CLUB DE L’OUEST [2009]
In this case, the Court was asked to interpret an indemnity in a licence agreement between a computer-game publisher, C, and the organisers of the Le Mans race (ACO). An indemnity is a promise to be responsible for another's loss usually arising from a breach of contract or warranty. Indemnities are worded in a variety of ways. They can range from wide-open coverage eg "all costs, losses, damages, expenses..." to more specific reference to the key areas of risk or to specific third party claims. Unless the contract provides otherwise, an indemnified party need not mitigate its loss.
facts:
C wanted to produce a computer game based on the Le Mans race. C and ACO entered into a licence agreement granting C the right to reproduce the designs of the participating cars, their names and logos.
The agreement contained the usual warranty regarding the right to grant all licences and an indemnity “from any claims, damages or demands arising out of any breach or alleged breach of any agreement or warranty made by the indemnifying party pursuant to this Agreement”. It transpired that ACO did not have the rights it had purported to grant.
decision:
The Court held that to claim under the indemnity for third party claims, the indemnified party must establish not that it acted reasonably, but that the fact and amount of any settlement were reasonable in all the circumstances. Acting reasonably will often typically amount to the same thing but the Court did say it was perfectly possible for a party to have acted reasonably but for the fact or extent of any settlement to have been unreasonable.
points to note:
- The Judge found the indemnity only applied to third party claims and did not apply to pure breaches of the contract itself which did not result in third party claims. This is slightly surprising since many commercial contracts do include indemnities in respect of such breaches.
- Although the wording suggested the indemnity might apply to third party claims (eg ‘defend’), the indemnity could have been interpreted as applying to breaches by the parties which do not result in third party claims; that may very well have been the intention of the drafting. The wording of the indemnity itself: “Each party will indemnify and hold harmless the other from any damages whatsoever arising out of any breach of any agreement or warranty made by the indemnifying Party [in] this Agreement” seems to support that view. However, the Judge did not interpret it that way, which emphasises the importance of clear drafting when formulating an indemnity. If an indemnity is intended to cover losses arising from breaches which do not result in third party claims, this perhaps needs to be unambiguous in the drafting.
- Unless expressly stated, there is no duty to mitigate liability covered by an indemnity. This is one of the primary reasons why parties sometimes object to giving an indemnity and if one has to be given it might be worthwhile expressly stating a duty to mitigate. However, the indemnity here was linked to a breach of warranty and hence arguably a duty to mitigate may still exist. The position might have been different had the indemnity been drafted so it was aimed more directly at any third party IPR infringement claim itself rather than indirectly through the breach of warranty. Remember also the point made above that the fact and extent of any settlement must be reasonable.
- Finally, regarding the nature and extent of any duty to mitigate if it applies, the Judge clearly took the view that as the rights to license went to the very heart of the transaction and the production of the game, C had much greater scope to act reasonably than if those rights were of lesser importance. An indemnified party is not necessarily obliged to take the option of least cost to the indemnifying party.